This past weekends post (HERE) likely my last ‘weekly’ look at whatever it is Global Wall Street is sayin’ / sellin’ and how exactly it is justified they’ve revised YEAR ahead outlooks all only days / weeks after they had been crafted.
This morning we’re waking to news of Golidlocks Kostin’s NEW and improved (higher) f’cast for the S&P. A month after setting it…
Bloomberg: Goldman Strategists Lift S&P 500 Forecast a Month After Setting It
Lower inflation and Fed easing to lift index to 5,100: Goldman
Morgan Stanley’s Wilson says market sees no Fed policy error
… Kostin sees the S&P 500 at 5,100 points by the end of next year, joining Wall Street peers like those at Bank of America Corp. and Oppenheimer Asset Management in expecting a fresh high in 2024. The Goldman strategist raised his forecast by almost 9% from the 4,700 level he predicted in mid-November.
There is also a risk that his earnings forecast of 5% year-over-year growth in 2024 may prove too pessimistic, thanks to looser financial conditions that should boost economic activity and company profits, Kostin said. The strategist previously said his team was right in predicting that the S&P 500 would show no profit growth in 2023, but was wrong to say the index wouldn’t climb this year.
… But even with the rally, Kostin noted that $1.4 trillion was poured into money-market funds this year as interest rates climbed, far higher than the $95 billion that flowed into US equities. “As rates begin to fall, investors may rotate some of their cash holdings toward stocks,” he said.
… This story is quite prevalent as can be see (HERE) over the weekend as Global Wall Street continues playing ‘catch down’ (rates)
… MARGARET BRENNAN: So, okay. So it is still possible to have a soft landing in other words, to avoid that, uh, recession, so many had feared. So it's still too early to declare victory.
GOOLSBEE: Yeah, for sure. It's too early to declare victory. We made a lot of progress. So the thing to remember is every time in the past that the Fed or other central banks around the world have had to get inflation down a lot. It has- basically always been accompanied by a major recession in 2023. We still get one more month of data, but 2023 looks like it's going to end up being a very substantial reduction in inflation without a big increase in the unemployment rate, that's the golden path that I talked about, but we're still above the target. We gotta get inflation down to target before it, it, it, until we are convinced that we're on path to that, it it's, it's an overstatement to, to be counting the chickens…
AND … may the force be with you over next couple of weeks (aka amateur hour in markets) … here is a snapshot OF USTs as of 705a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are mixed to a hair higher/steeper this morning after a weekend largely free of market-moving news (see above). DXY is UNCHD while front WTI futures are higher (+0.75%) this morning. Asian stocks were mostly lower, EU and UK share markets are mostly lower (SX5E -0.4% but FTSE 100 +0.55%) while ES futures are showing +0.15% here at 6:45am. Our overnight US rates flows saw early buying in 2's to 3yrs that later spread out to 10's in a very quiet trade. Overnight Treasury volume was somehow ~90% of average…
… and for some MORE of the news you can use » The Morning Hark - 18 Dec 2023 and IGMs Press Picks (who CONTINUES to be sportin’ that new, fresh look) in effort to to help weed thru the noise (some of which can be found over here at Finviz).
Moving from some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ …
The “everything” rally since the Fed meeting implies there was a lot of money on the sidelines waiting to be put to work after the passing of the risk event. We believe this suggests risks of a flow-driven “melt-up” of asset valuations into year-end.
We continue to like USD shorts and believe that we are at the early stages of a structural downtrend.
At the BoJ meeting this week, we look for the central bank to scrap forward guidance, preparing for an exit of NIRP in January. We remain short USDJPY.
… there was conspicuously little discussion on the recent dramatic loosening of financial conditions (Figure 2) and what it could imply for future policy.
Goldilocks Global Views: The Great Disinflation (armed and dangerous with the economically workbenched data served up…interesting, too, NOTHING on BoJ)
1. Global inflation continues to plummet. Averaging across the broad group of economies that saw a large and unwanted post-covid price surge—the G10 excluding Japan plus the EM early hikers—we estimate that core inflation ran at a sequential annualized pace of 2.2% over the past three months and just 1.3% in November. We therefore now see earlier and more aggressive rate cuts from several major DM central banks.
2. The shift in monetary policy expectations has been particularly abrupt in the US. At the December 13 FOMC press conference, Chair Powell said that the committee would want to cut “well before” inflation falls to 2% year-on-year, which we interpret as a threshold of around 2.5% with an expectation of ongoing declines. While this was not dramatically different from Powell’s guidance at previous meetings, it came on the back of CPI and PPI releases for November which suggest that core PCE inflation should hit that 2.5% threshold as soon as February 2024 before falling further to 2.1% in May. Since the February print will be largely forecastable based on the CPI and PPI releases in mid-March, we now expect the first cut at the March 20-21 FOMC meeting.
3. We see the committee delivering at least three back-to-back 25bp cuts, probably in March, May, and June. Such an adjustment would resemble the 1995, 1998, and 2019 episodes, and anything less would raise the question “why bother?” But 75bp in cuts would still leave the funds rate at 4½-4¾%—a level 200bp above the FOMC’s median estimate of the longer-term funds rate—at a time when year-on-year core PCE inflation is close to 2%. We have therefore penciled in two further quarterly cuts in the second half of 2024, for a total of five cuts in 2024, as well as three quarterly cuts in 2025 that take the funds rate down to 3¼-3½% in September 2025…
With Powell not pushing back on the easing in financial conditions, equities appear to have the green light to ramp higher. We explore the potential factors that led to the dovish guidance, the extent to which rates and equities anticipated the move and the bull case for small caps.
… Notice the instances in Exhibit 4 when the Fed begins to cut aggressively and gets ahead of what the market was projecting 5 months earlier (blue line accelerates away from yellow line). Each case was preceded by some exogenous event (1990-Iraq invasion of Kuwait, oil doubles; 2001-9/11; 2008-Lehman; 2020-COVID). Currently, the forward curve for Fed funds is projecting the Fed to stay slightly more hawkish than what the 2-year UST yield is suggesting, although it's still showing the Fed following the directional path projected by 2-year UST yields. In the absence of an "event," this is the path that makes the most sense—i.e., markets seem priced for gradual cutting by the Fed but nothing extraordinary. As discussed earlier, front end rates are in restrictive territory. In fact, even if the Fed follows the path now priced into the forward curve, rates may remain restrictive at the end of 2024. This is why it's important to watch the growth data (both macro and micro) from here to see if these policy shifts and significantly lower yields can have the desired positive effects.
What makes this Fed cycle different from the others is that there are new forms of liquidity being provided to the markets that are hard to measure. More specifically, we view the reverse repo facility as a form of liquidity that has helped fund the Treasury's issuance this year. With only ~$680B left in this facility (down from ~$2.5T at the end of last year), and another significant deficit likely next year, it will be important to see how this dynamic evolves next year. It's not an issue today and we expect the reverse repo to continue to offset QT and absorb issuance for the time being…
China's recent policy announcement leaves us expecting that further policy stimulus will be needed in 2024 to support Chinese reflation and overcome our 3D risks of debt, deflation, and demographics.
MS: Sunday Start | What's Next in Global Macro: The World Will Decide
Last week, my colleagues, led by Michael Zezas, published a note on US elections, but around the world as many as 40 countries will hold elections next year. In some cases, the implications of the outcomes will be almost purely domestic. For example, we already had a momentous election in Argentina which drove an immediate reaction in markets as President Milei has promised sweeping structural reforms (see more here on FX and here on external accounts). In Argentina, the choice was between very different paths for domestic fiscal policy, but in 2024 other elections will matter on a global scale…
Federal Reserve Chair Powell sparked an “everything” rally last week. This prompted the others on the FOMC to dampen the more extreme speculation. New York Fed President Williams (an economist, so deserving of considerable respect) suggested a March cut was not feasible. Markets have retreated in response…
EPS Growth Makes Comeback After 3 Quarter Profits Recession Strong Surprises Throughout 2023 TECH+ Earnings Retaking Center Stage
… And from Global Wall Street inbox TO the WWW,
Bloomberg: To Trade the Fed’s Pivot, Wall Street Turns to Short-Dated Debt
Fed easing in 2024 expected to spark unwind of inverted curve
Money fund holders have new reason to move into short notes
The best way to play the Federal Reserve’s pivot toward monetary easing is to load up on shorter maturity debt that still provides a 4%-plus yield…
… Long-term debt is set to underperform, as traders want to be compensated for the added risk they see embedded in these securities. Among their concerns: a continued onslaught of issuance to finance the persistently high US government deficit as well as tail risks that inflation could reignite next year.
Bloomberg: Long-Dated Treasuries Enter Bull Market as Fed Pivot Feeds Rally
Treasury bond ETF gains 21% from 16-year low in October
Gets $1.3 billion Friday, biggest inflow in almost five months
A vehicle used to track longer-dated US government bonds surged into a bull market, as investors seek to end three years of pain on the Federal Reserve’s willingness to consider interest-rate cuts.
The iShares 20+ Year Treasury Bond ETF, a popular tool for betting on long-dated debt, jumped to touch 99.35 on Friday. That’s a gain of 21% from the 16-year low reached on Oct. 23, qualifying as a bull market. The gauge is still down more than 40% since it peaked in 2020…
Bloomberg: Jerome Powell’s Pivot Is a Pretty Big Gamble (Dudley OpED)
The US Federal Reserve has bet its reputation on a soft landing. Here’s hoping it works out.
The US Federal Reserve and its chair, Jerome Powell, are betting that they can have the best of both worlds — that they’ll be able to defeat excessive inflation without forcing the economy into recession.
I hope it goes well. Unfortunately, there’s still a significant chance it won’t…
… Powell has repeatedly emphasized that the Fed must finish the job, ensuring inflation gets back to 2% and stays there. Yet the more weight he puts on cutting rates to avoid a recession, the greater the risk of failing to control inflation — and of markets getting a big, unpleasant surprise. One way or another, 2024 promises to be an interesting year for the economy, the Fed and financial markets.
Bloomberg: China Should Trim US Treasury Holdings, Ex-PBOC Adviser Says
… The appeal of American debt to other countries is also declining given the “weaponization” of the dollar by Washington, Yu said, echoing Beijing’s complaints about the US’s use of financial sanctions.
“Therefore, China should accelerate the adjustment of its overseas asset and liability structure, improve returns on overseas net assets and lower the share of foreign exchange reserves in its overseas assets,” Yu said. The nation should trim its ownership of Treasuries by “stopping the purchase of new notes after existing holdings mature.” …
2024 is a Presidential Election year.........that clears everything up
2 weeks and a lot of nasty White House phones later...WALA....we have Rate Cuts on the table
The "magical" corruption of Washington DC.....LOL!!!!
Let's see what is more important: my career or vanquishing inflation ???
Joe Biden has now convinced J. Powell, what that answer needs to be....
Please keep up your fine work....